Important Change for Developers Obtaining Tax Abatement in MissouriJune 5, 2020
Developers interested in obtaining tax abatement through Industrial Revenue Bonds as authorized by Missouri Revised Statutes Chapter 100 should be aware of a recent change in the law that creates bonding obligations for the construction of Chapter 100 projects. Prior to this change, no bonding obligations applied to Chapter 100 projects.
Bonds issued under Chapter 100 may be used to provide tax abatement in conjunction with eligible projects, defined as warehouses, distribution facilities, research and development facilities, office industries, agricultural processing facilities, service facilities, manufacturing plants, and rental housing. Chapter 100 Bonds are typically issued by the municipality in which a project is located and are held by the developer who purchased the property that includes the project. Prior to the municipality’s issuance of the Chapter 100 Bonds, the municipality and developer must agree to the terms of the tax abatement to be provided, including the length and amount of abatement and whether the developer will be responsible for making “payments in lieu of taxes” to the municipality. The municipality must approve the project and tax abatement, including a “plan for industrial development.” After the purchase of the property by the developer, and upon approval of the transaction by the municipality, the Chapter 100 Bonds are issued.
Traditionally, the municipality and the developer would enter into a purchase/lease transaction before the project was constructed, by which the municipality takes ownership of the property where the project is located, then leases it back to the developer. The lease agreement between the parties requires the developer to purchase and construct the project and provides for rental payments by the developer to the municipality in the amount of the debt service due and payable on the Chapter 100 Bonds. The rental payments are then returned to the developer in the form of principal and interest payments on the bonds, which are held by the developer. As a function of the municipality’s ownership of the property, exemptions from local property tax (and, potentially, sales and use taxes) for certain items flow through to the developer/lessee of the property. At the end of the lease term, ownership of the property is transferred back to the developer.
In August 2019, Missouri Revised Statutes Section 107.170, which controls bonding requirements for public projects, was revised to provide that bonding is required by a public entity in making contracts for public works, to be performed for the public entity’s lessees, agents, designees, or representatives on work for nongovernmental purposes, with the amount of the bond to be fixed by the public entity. The definitions of the terms “public entity” and “public works” as provided in Section 107.170 make clear that the bonding requirement now applies to a municipality’s lessees, including developers on a Chapter 100 transaction. Any construction or similar contracts entered into and to be performed for the developer are likely to be considered to be performed for nongovernmental purposes, triggering the Section 107.170 bonding requirements.
In order to complete a Chapter 100 transaction where title to the project passes to the municipality before construction is completed, developers must now be willing to obtain bonds as required under Section 107.170 (and bear the associated costs). Some municipalities might be willing to instead structure a Chapter 100 transaction to defer transfer of the project property until the project is completed and the developer can provide appropriate lien waivers. Developers should be aware that any such delay in transfer of the project will delay the commencement of the tax abatement and might affect the developer's original budget and revenue assumptions.
Our public finance attorneys are experienced in advising clients on a wide range of taxable and tax-exempt bond financings. If you need help obtaining tax abatement through Industrial Revenue Bonds as authorized by Missouri Revised Statutes Chapter 100, contact an attorney listed above, or click here to learn more about our practice.